Feb. 2 (Bloomberg) -- Italian government bonds fell as
demand declined at an auction of 10-year debt after a slide in
borrowing costs to the lowest level in more than two years last
week fueled concern the securities are too expensive.

Italy’s 10-year yields climbed to a four-week high after a
report showed consumer confidence unexpectedly declined to the
lowest in at least 17 years. German 10-year bund yields reached
the most since September after unemployment declined more than
analysts’ forecast in January, adding to signs that Europe’s
largest economy is gathering pace. Irish two-year notes climbed
for a fifth week, the longest run of gains since September, as
Natixis Asset Management said it is buying the nation’s bonds.

“The Italian auctions weren’t spectacular, given the
relatively expensive levels,” said Michael Leister, a fixed-income strategist at Commerzbank AG in London. “The market was
digesting the supply and there was also some profit taking after
the significant rally that we’ve seen this year.”

Italian 10-year yields climbed 20 basis points, or 0.20
percentage point, over the week to 4.33 percent at 4:37 p.m.
London time yesterday, after reaching 4.41 percent on Jan. 31,
the highest level since Jan. 2. The 5.5 percent security due
November 2022 fell 1.665, or 16.65 euros per 1,000-euro ($1,370)
face amount, to 109.590. The rate dropped to 4.07 percent on
Jan. 25, the least since Nov. 10, 2010.

Italian Confidence

The Rome-based Treasury sold 3.5 billion euros of 10-year
debt on Jan. 30 at 4.17 percent, down from 4.48 percent at the
previous auction on Dec. 28 and the lowest since Oct. 28, 2010.
Investors bid for 1.32 times the amount of the 10-year debt
allotted, down from 1.47 times in December. The nation also sold
3 billion euros of notes due in 2017.

Italy’s consumer confidence index dropped to 84.6, the
least since the series began in 1996, from 85.7 percent in
December, data released on Jan. 28 showed. The number of people
out of work in Germany fell 16,000 to 2.92 million, a separate
report on Jan. 31 showed. Economists predicted an increase of
8,000, according to a Bloomberg News survey.

ECB Decision

The European Central Bank will leave its benchmark interest
rate at 0.75 percent when it meets on Feb. 7, according to all
58 analysts in a Bloomberg News survey. Spain plans to sell
securities maturing in 2015, 2018 and 2029 on Feb. 7, while
Germany will auction 4 billion euros of 0.5 percent 2018 notes
the day before.

“We expect the ECB to hold policy steady,” Victoria
Clarke, an economist at Investec Securities in London, wrote in
a note to clients on Jan. 31. “With economic indicators having,
if anything, strengthened modestly since that last meeting, a
steady main refinancing rate seems the most likely outcome.”

Italian bonds returned 1.5 percent this year through Jan.
31, according to indexes compiled by Bloomberg and the European
Federation of Financial Analysts Societies. Irish securities
gained 2.3 percent, while German bunds handed investors a loss
of 1.8 percent.